Government policy, ethanol and rising food prices

As concerns about rising gasoline and food prices continue to swirl, corn ethanol is being pointed at as a causative factor. Is that the case and, if so, can it be easily reversed?

On May 7, the U.S. Senate Committee on Homeland Security and Government Affairs held a hearing on fuel subsidies and their impact on food prices. Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University, was one of those invited to testify (see accompanying excerpt).

Largely, Babcock focused on three federal policies: the Renewable Fuels Standard, the blenders tax credit, and the tariff on imported ethanol.

The 51-cent-per-gallon blenders tax credit “is a direct subsidy given to gasoline blenders. The credit increases the willingness of blenders to buy ethanol. This increased demand increases the price of ethanol, ethanol profits, and production, the demand for corn, and the price of corn. The tax credit has greatly stimulated the growth of the industry.”

The Renewable Fuels Standard “specifies minimum biofuels consumption levels for the United States. Mandated use rises from 9 billion gallons in 2008 to 10.5 billion gallons in 2009. These mandates can be met from either domestically produced or imported biofuels.”

Babcock studied three scenarios around those policies: (1) waive the mandates, but keep the tax credit and the import tariff; (2) keep the mandates but eliminate the import tariff and the tax credit; and (3) eliminate all three.

A week after his Senate visit, Babcock spoke with Southwest Farm Press about his findings on ethanol, common misperceptions around it and how the new farm bill might impact the industry. Among his comments:

Reading news accounts of your Senate testimony, the focus seemed to be on bits that put ethanol in a bad light. But reading the whole thing, there are things that are positive for ethanol proponents.

“That's the idea. I'm neither anti- nor pro-ethanol and the testimony reflects that. I was just trying to answer the questions the committee put to me: what would be the effect of a change in federal (ethanol) policy in the short- and long-run on ethanol price and availability, on commodity price and availability and the food price?

You're actually an investor in an Iowa ethanol venture…

“Oh, yeah. Lincolnway Energy is our local ethanol plant. When they called for investors, I figured if I put in $23,500 — the minimum investment — I'd follow the ethanol industry way more closely. I needed to do that anyway.”

Reaction to your testimony?

“Some people think that because subsidies were a key to growing the industry, if they were taken away that growth would be reversed. They don't think about ‘fixed capitol’ — once something is built, it doesn't just go away.

“The response has been one of education. I haven't heard from anyone who's disagreed with the analysis. Some Extension colleagues around the country have been sending the testimony around. One said, ‘This is what we've been trying to tell people, but until now haven't had a formal model and estimates.’”

In the Mid-South, it's more about soybeans and biofuel. Similarities/differences with corn ethanol?

“If you got rid of the mandate on biodiesel — given where we think soybean oil prices will be — you won't run biodiesel plants using only soybean oil. The price of the feedstock is just too high.

“So, if you got rid of the mandate you'd see less biodiesel produced. I think most of the mandate in the short-term — when starting at 600 million gallons of biodiesel — would be met by non-soybean oils. It would be waste grease, tallow, things like that.”

What about the new farm bill? Has Congress' approach to ethanol changed in any fundamental way or is it the same in a different wrapper?

“It's exactly the same with two small exceptions.

“The first exception is they've lowered the blender's tax credit from 51 to 45 cents. That'll reduce the ethanol price a little bit, but not much. And the price of corn won't change much.

“Second, they said if you can create a gallon of biofuel from cellulosic feedstocks, we'd provide a $1 per gallon tax credit. So, they upped the ante for cellulosic biofuel.”

You've surely heard others argue that field corn isn't eaten, was being grown before the world food shortages occurred and had nothing to do with them.

“First, food use of field corn swamps sweet corn production. We eat more field corn than sweet corn. Field corn is in snacks, chips, (on and on).

“Second, there's no doubt that ethanol has increased the price of corn. There's no doubt, at all.

“And there's no doubt ethanol has increased the price of soybeans. To grow more corn, we grow fewer soybeans since they're in competition for acreage. That's particularly true in the Corn Belt.

“And the ethanol impact on corn and soybean prices has had some impact on the competition for land for wheat. But it's had almost no competition for rice land — rice land is different.”

There's another common belief regarding the energy it takes to grow crops to produce ethanol. It is often claimed that growing feedstock and processing the fuel costs more energy-wise than the fuel ultimately provides.

“That's a myth. The USDA has debunked that, and I did a small study looking at that.

“If you take the least productive land and irrigate the heck out of it and don't give any credit for the DDG (dry distillers grain) that comes out of the biofuel refinery, then it might cost more energy than it provides. But if you're on normal, productive land and take into account changes in technology to convert corn to ethanol and give full credit for the DDG — the corn doesn't just disappear, 20 to 25 percent comes back into the feed market — you'll definitely have a net positive energy balance. (Saying otherwise) is a myth.”

On importing Brazilian sugar-based ethanol…

“Some people think we should just get rid of the import tariff and bring in all sorts of Brazilian ethanol. There's a limit to how much ethanol Brazil can export to us. That upper limit may be 1.5 billion gallons.

“Some people think getting rid of the ethanol import tariff would mean the demise of the U.S. ethanol industry. That isn't correct. But if you were to get rid of the tariff and keep (the Renewable Fuels Standard and the blenders tax credit), over the long haul Brazil would invest and expand their ethanol industry for export. In the longer run — three to 10 years — we'd see tremendous competition from Brazil.

“Brazil is already ramping up for export. But I think it'll take three years to (get up to full speed). They have to build the plants, get land cleared and prepped for sugarcane production and other things.

“In the long run, Brazil would be a major competitor to the U.S. with ethanol. That's for sure.”

We grow sugarcane here in the States. Why can't we do the same thing Brazil is doing with ethanol?

“We could except our sugarcane area is much smaller than Brazil's. We don't have the area that's climatologically appropriate for sugarcane production.

“We also have a ‘sugar program’ that raises the prices of sugarcane to non-economic levels. It makes the feedstock so expensive that we wouldn't grow sugarcane for ethanol.”

In your testimony, you said, “My colleagues and I estimated that a 30 percent change in the price of corn, along with corresponding changes in the prices of other crops, would change home food expenditures by about 1.3 percent.” Considering the uproar over food prices did that low figure surprise you?

“It did. However, that percentage may be a bit low because we didn't take into account what might happen to canned vegetable or bean prices because of competition for land. That would increase the contract price that vegetable growers would have to be paid to keep them from going to field crop production.

“That said, (the figure isn't wildly off). USDA also came up with a similar estimate. When they ran the numbers — and did a historical analysis of the change in feed grain prices as they relate to food prices — our estimate was right on the mark.”

What you're ultimately suggesting is everyone shouldn't be worrying about $6 corn, but $6 gas.

“That's right. USDA estimates that food prices have risen about 4 percent per year for the last two years. Energy prices have been a bigger contributor to that than feed/commodity prices.”

I wanted to touch on your very last sentence of testimony: “If we continue to see crude oil prices in excess of $100 per barrel, then there is little that Congress or the EPA can do in the short run to significantly reduce the price of corn short of an outright ban on producing ethanol from corn.” Has anyone on the political side been willing to even suggest something like that?

“Absolutely not — and it won't happen. But that's what must occur if they want to affect commodity prices: ban corn ethanol. Short of that, there's not much you can do in the next year or two.”